Flowers Foods Reports Third Quarter 2013 Results And Updates Full-Year Guidance
08 Nov 2013 --- Flowers Foods, Inc. (FLO), the second-largest producer and marketer of fresh packaged bakery foods in the United States, reported results for its 12-week third quarter ended October 5, 2013. Sales increased 22.5% to $878.5 million. Including acquisition-related costs of $0.02 per diluted share, diluted earnings per share (EPS) was $0.16.
Excluding acquisition-related costs, diluted EPS rose 5.9% to $0.18 over last year's third quarter. Strong performance in the company's direct-store-delivery (DSD) segment was offset by higher marketing expense, margin pressure in the warehouse segment, and added infrastructure to support sales growth. In summary, during the quarter:
- Volume increased 20.1%, acquisitions contributed 3.6%, and net price/mix was unfavorable 1.2%;
- Gross margin (excluding depreciation and amortization) of 46.7% was flat compared to the third quarter of fiscal 2012;
- EBITDA margin, excluding the acquisition-related costs, was 10.3% for the quarter;
- Earnings before interest and taxes (EBIT) as a percent of sales was 6.9%, excluding acquisition-related costs:
- DSD segment (83% of sales) operating margin was 8.7% of sales, impacted 70 basis points by carrying costs of acquired Hostess assets;
- Warehouse segment (17% of sales) operating margin was 4.8% of sales, impacted by margin pressure on certain frozen foodservice business;
- Generated $44.7 million in cash flow from operations;
- Completed the acquisition of 20 closed bakeries; the Wonder, Merita, Home Pride, Butternut, and Nature's Pride brands; and 36 depots from Old HB, Inc. (formerly Hostess Brands) for $355.0 million. Reintroduction of Wonder, Merita, Home Pride and Butternut brands across Flowers' DSD territory began in late September and will continue throughout 2014.
- Updated 2013 guidance--maintaining expectation for sales growth of 24.5% to 25.5% or $3.793 billion to $3.824 billion; revised earnings per share guidance to $0.90 to $0.93, reflecting 30.4% to 34.8% growth.
Commenting on third quarter results, President and CEO Allen Shiver said, "We achieved another quarter of robust sales growth as our team capitalized on opportunities presented by the marketplace and our recent acquisitions. The DSD segment achieved exceptional sales growth for our fresh breads, buns, rolls, and snack cakes and delivered operating earnings in line with our expectations. In the warehouse segment, our cake business fell slightly short of expectations. Overall earnings were impacted primarily by the warehouse frozen foodservice business, which experienced margin erosion. We are taking action to improve margins in that portion of our business.
"The integration of Lepage Bakeries, Sara Lee/California, and Hostess bread assets, all of which were acquired in the last 18 months, is ongoing. Our team is leveraging the strength of our brands and operations to grow in new markets and with new customers. Late in the quarter, we began reintroducing our newly acquired brands--Wonder, Merita, Home Pride, and Butternut." Shiver said the company expects the acquired brands to gain momentum as the reintroduction continues.
Commenting on 2013 guidance, Shiver said, "This is a remarkable year for Flowers Foods and our top line guidance reflects the success of our growth strategies as we make acquisitions, enter new markets, and take advantage of changes in the marketplace. Our revised earnings guidance takes into consideration the margin decline in the warehouse segment, higher-than-planned marketing expense in the second half, and added infrastructure for the significant increase in volume.
"Flowers Foods is well positioned with the brands, products, bakeries, strategies, and experienced team to achieve further sales and earnings growth as we continue to build long-term value for shareholders," Shiver concluded.
Third Quarter 2013 Results
For the 12-week third quarter of 2013, sales increased 22.5% to $878.5 million compared to $717.3 million in last year's third quarter. This increase was attributable to increased volume of 20.1% and contributions from the Sara Lee/California acquisition of 3.6%, partially offset by unfavorable net price/mix of 1.2%. The company cycled the Lepage Bakeries acquisition in the first week of the third quarter. Dollar sales and volume increased across all channels. Increases in the soft variety, white bread, buns and rolls, and single-serve cake categories primarily drove volume increases in the branded retail channel. Volume increases in the store brand channel were driven by increases in the white bread, buns and rolls, and variety bread categories. The non-retail channel volume increases were primarily in the foodservice, vending, and restaurant categories. The unfavorable net price/mix was driven primarily by a mix shift in the cake business to more single-serve snack cakes and negative price/mix in the foodservice category.
Net income for the quarter was $33.9 million, or $0.16 per diluted share. Excluding acquisition-related costs in both years, net income for the quarter was $38.4 million, or $0.18 per diluted share compared to $35.2 million, or $0.17 per diluted share in the third quarter of fiscal 2012. During the third quarter this year, the company incurred acquisition-related costs of $4.5 million, net of tax, or $0.02 per diluted share. During the third quarter of last year, the company incurred acquisition-related costs of $4.0 million, net of tax, or $.02 per diluted share. Including these items, net income was $31.2 million, or $0.15 per diluted share.
Gross margin (excluding depreciation and amortization) as a percent of sales was 46.7%, or flat compared to the third quarter of 2012. Increased outside purchases as a percent of sales, decreased manufacturing efficiencies, and carrying costs related to the acquired Hostess assets were offset by higher sales volumes and decreased ingredient and workforce-related costs as a percent of sales. Although ingredient costs as a percent of sales decreased, prices for ingredients rose.
Selling, distribution, and administrative (SD&A) costs as a percent of sales for the quarter were 37.3%, up 140 basis points from 35.9% of sales in the third quarter of fiscal 2012. Acquisition-related costs negatively impacted SD&A costs by $7.0 million, or 80 basis points as a percent of sales in the third quarter of 2013. In last year's third quarter, acquisition-related costs negatively impacted SD&A by $5.1 million, or 70 basis points as a percent of sales. Increased workforce-related costs and marketing costs were the main drivers of the increase as a percent of sales.
Depreciation and amortization expenses for the quarter remained relatively stable as a percent of sales compared to last year's third quarter. Net interest expense decreased slightly in this year's third quarter compared to last year's third quarter primarily because of increased interest income associated with an increase in distributor notes receivable outstanding. The effective tax rate for the quarter was 32.4% compared to 36.4% in last year's third quarter, due primarily to a discrete benefit recorded by the company. The full-year tax rate is expected to be approximately 35.5% to 36.0%, excluding the effect of discrete items and the bargain purchase accounting gain recorded in the first quarter this year.
Income from operations (EBIT), adjusted for acquisition-related costs (adjusted EBIT), was $60.3 million, or 6.9% of sales, compared to adjusted EBIT of $57.8 million, or 8.1% of sales, in last year's third quarter. Including the acquisition-related costs, EBIT was $53.3 million, or 6.1% of sales in the third quarter this year, compared to $52.7 million, or 7.3% of sales in the third quarter last year. Carrying costs related to the acquired Hostess assets negatively affected EBIT margin 60 basis points in the third quarter this year.
Earnings before interest, taxes, depreciation, and amortization (EBITDA) adjusted for acquisition-related costs (adjusted EBITDA) for the third quarter was $90.2 million, or 10.3% of sales, compared to adjusted EBITDA of $82.5 million, or 11.5% of sales in last year's third quarter. Including the costs, EBITDA was $83.2 million, or 9.5% of sales in the third quarter this year, compared to $77.4 million, or 10.8% of sales in the third quarter last year. Carrying costs related to the acquired Hostess assets negatively affected EBITDA margin 30 basis points in the third quarter this year.
Segment Results
DSD (83% of sales): During the quarter, the company's DSD sales increased 23.2%, reflecting volume gains of 15.9%, contributions from the Sara Lee/California acquisition of 4.3%, and positive net price/mix of 3.0%. The company cycled the Lepage Bakeries acquisition in the first week of the third quarter. Dollar sales and volume increased across all channels. Increases in the soft variety, white bread, buns and rolls, and cake categories primarily drove volume increases in the branded retail channel. Increases in the store brand channel were driven primarily by increases in the white bread and buns and rolls categories. The non-retail channel volume increases were primarily in the quick serve and other restaurant categories. The positive net price/mix was primarily driven by the branded retail channel.
Income from operations for the DSD segment was $63.6 million, or 8.7% of sales for the third quarter compared to $58.6 million, or 9.9% of sales in last year's third quarter. Increased sales volumes were the primary drivers of the increase. Carrying costs related to the acquired Hostess assets negatively affected income from operations 70 basis points in the third quarter this year. Decreased manufacturing efficiencies also had a negative effect on income from operations.
Warehouse (17% of sales): Sales through warehouse delivery increased 18.9%, reflecting volume increases of 34.4%, partially offset by negative net price/mix of 15.5%. Dollar sales and volume increased across all channels. Branded cake (primarily single-serve items), foodservice, and vending were the primary drivers of the volume increases. The foodservice category was the primary driver of the unfavorable net price/mix.
Income from operations for the warehouse segment was $7.1 million, or 4.8% of sales for the third quarter compared to $7.6 million, or 6.1% of sales in last year's third quarter. This decrease was due primarily to increased outside purchases and lower manufacturing efficiencies, partially offset by increased sales volumes.
Cash Flow
During the third quarter, cash flow from operating activities was $44.7 million. The company invested $25.5 million in capital improvements and paid dividends of $23.5 million to shareholders. The company did not acquire any shares of its common stock during the quarter. The company has acquired 58.3 million shares of its common stock under its 67.5 million share repurchase plan.
Other Matters of Importance
In April of this year, the company entered into a senior unsecured delayed-draw term loan facility with a commitment of up to $300.0 million, which was fully drawn during the third quarter to finance the Hostess transaction and to pay certain acquisition-related costs and expenses. During the third quarter of 2013, the company also entered into a two-year, $150.0 million receivables loan, security, and servicing agreement, partial proceeds from which were drawn to finance the Hostess transaction.
Outlook for 2013
R. Steve Kinsey, executive vice president and chief financial officer, said the company expects 2013 sales of $3.793 billion to $3.824 billion, an increase of 24.5% to 25.5% over 2012. The Lepage and Sara Lee/California acquisitions are expected to contribute approximately 7.0% of the sales increase. Including the impact of financing and carrying costs of the acquired Hostess assets, but excluding acquisition-related costs and the bargain purchase accounting gain, earnings per share are now forecast to be $0.90 to $0.93, an increase of 30.4% to 34.8% over the 2012 adjusted earnings per share of $0.69. Previous guidance was for earnings per share of $0.92 to $0.98. Capital expenditures for 2013 are expected to be $90.0 million to $100.0 million.
